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The Classic Software Conundrum - To build or to buy!

 

The benefits of software to a business are innumerable. From cost reduction through process automation to improved efficiency and collaboration, software can add tremendous value to almost every aspect of your business and operations. However, there exists an important decision for every business. This decision is whether to buy software as a service or build a proprietary software for their business.

Every organization has its particular strategies for growth and expansion and software is usually an integral part of this. Sometimes these strategies require software with specific attributes to aid their execution and may lead to the business searching for a certain combination of features or a specific degree of white labelling/branding which may not be readily available. Indeed, there are a myriad of reasons why companies are forced to consider which is the better option; to build or to buy.

 

Below, we discuss a few things you must consider in making this important decision.

 

 

The Business Need

It is important to critically analyze the business needs and identify what specific gaps you need the software to fill. Then consider the available options in the market to determine if they possibly meet your needs. If your business segment exists within a mature industry, it is very likely that software already exists that will cover your most important needs. However, if your business is unique, there is a high likelihood, but not necessarily a uncertainty, that your best bet would be to build your own software. Often though there may be an opportunity for a SaaS company to customize their software with the features you are looking for.

Cost

Simply put, it is expensive to build your own software. The more robust and complex the software is, the more it costs. All the cost associated with the software will be yours to carry if you decide to build. Regardless of whether or not you choose to hire a software company to build your software or acquire the resources to build it in-house, you will need to carry both the short term cost of building it and long term costs of maintenance and support. 

However, if you buy from a software company, you avoid this substantial, immediate cash outlay and would most likely be paying a periodic fee. It is important to note that your contract can include accommodations that help your unit cost reduce as your business scales over time. It is also important to note that companies that sell software as a service, spread the cost of creating and managing the software to their numerous customers and therefore you do not carry a high cost.

 

Time to Value

Another very important aspect to consider is how long you are prepared to wait before you start deriving value from your software. It takes time to build a proprietary software, while you can buy a software as a service from an existing provider and commence utilization almost immediately. Put differently, if you need a solution now, buy. If you have adequate time as well as all other resources required to build your software, then you can consider building.

 

Comparative Advantage

A company is said to have a comparative advantage at producing something, if it can make it at a cheaper rate than another company. In this case, the experience, knowledge and market intelligence available to the software companies puts them in a position to have comparative advantage over you. The years of experience will help them avoid common mistakes that companies who do not do this as a business will make and effectively reduce their cost of delivery. You may also want to consider some of the advancements that are coming in software development like AI (artificial intelligence), data mining and voice-activated commands that will all play a major role in the near future. On the flipside, the lack of experience in building your own software and knowledge of the market may lead to loss of efficiency in the creation of your proprietary software. It is most effective to play in your area of core competence, where you have comparative advantage.

 

Opportunity Cost

In building your own software, what is the alternative forgone? Your core business is most-likely not software development, therefore all the resources you channel to software development could have been redirected to your core business. In rationalizing this, it is important to consider how much revenue you would have earned, by what percentage your share of the market would have grown, the impact on your cash flows and business etc. If you buy a software instead, you can directly channel all the resources you would otherwise have deployed to your core business.

Absolute Risk

In addition to the risk of running a business, you would carry on the additional risk of building, optimizing, updating and supporting your proprietary software. This introduces numerous additional risks to your business as a whole. When you buy software as a service, you essentially outsource all these additional risks to your provider whose area of core competence it is. With years of experience under their belt, they are better equipped to manage these risks. However, in situations when you buy software, you also share the market risk of your service provider. It is therefore important to choose your software provider carefully.

 

 

Conclusion

The decision to make or buy your software is a difficult one. Some schools of thought suggest that in the short term, you can buy, but in the long term, you build. The major consideration for this is that you realize more value over time for the initial cost outlay and support requirements as you have absolute control of the software and can deploy it exactly how you require. However, this argument is countered by the assertion that if your business exists within an existing and mature industry, it is very likely that great software already exists to cater to most of the specific needs of your industry at a mere fraction of the cost to build. Even in the long term, with the right conditions in your contract with your service provider, you can reduce cost as your business scales. Some others suggest that buying a software may expose your company data and records to third parties, but these can be resolved with the right privacy clauses covering the use and storage of your data during and after your time of using the service. All things considered, unless the market does not have software that reasonably meets your needs, you may be best served by buying a software instead of building one.